Public Finance

Public Finance

Public Finance the study of the nature and effects of the Government's use of fiscal instruments taxing and spending, borrowing and lending, buying and selling. It includes the interrelationships between Government agencies, as between the central Government and local authorities of a single country. It is sometimes considered to include the study of public utilities and nationalized industries, which may be self-financing like any other business and thus lie outside public finance 'proper', but their relationship with Government often brings them into the discussion of public finance.

The essential subject-matter of public finance is the provision by public authorities of 'public or 'collective' goods or services that cannot be purchased in small lots by individuals, such as defence and public health, and the way in which they are financed. When the Government spends money on, for example, the armed forces or education, it affects the pattern of production and consumption. Levying taxes to pay for Government spending (and the way in which it benefits particular groups) affects the distribution of income and wealth. The magnitude and distribution of taxation affects the type and level of total output; so will Government decisions to finance part of its expenditures by borrowing rather than taxing, or to levy taxes in excess of budgeted expenditures. The management of the National Debt (the accumulation of earlier borrowing) raises problems for monetary policy. Taxing and spending affects the nature and amplitude of cyclical business fluctuations and, in the longer run, the rate of economic progress.

The central Government is thus not a separate sector of the economy, concerned only to supply community needs that the market cannot supply adequately or at all. It also holds the ring' in its ability to influence economic activity as a whole. Discussion of public finance must therefore either assume or analyse the aims of fiscal policy. Possible policy aims include a high and stable level of employment without inflation, a high rate of economic growth, a strong currency, a more equal distribution of income, a high degree of freedom of choice for consumers, employees, traders, investors, business men and others. One aspect of public finance is to examine such aims, whether explicitly stated or not, to consider how far practice diverges from them, how far they are compatible with one another, and to show the nature of possible conflict.

'Principles' of taxation are commonly analysed in the literature on public finance. Taxation, it is variously argued, should be 'just', � equitable', 'economic', etc. These terms are rarely defined rigorously and can be interpreted in various senses, so that writers have used them to support recommendations for proportional, progressive or even regressive tax systems. No principles of taxation can be inferred from economic analysis alone, without assumptions based on political and ethical judgments. Nevertheless economics can help in examining the general effects of alternative fiscal proposals on prices, interest rates, saving, investment, incentives, profits, business location and organization, production, employment, incomes, wages and so on. Go

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